Tax Charge Dents Giorgio Armani Profits

Boosted by gains in all markets, the firm continued to grow revenues and margins in 2013.

MILAN — Boosted by gains in all markets, the Giorgio Armani Group continued to grow revenues and margins in 2013, but its bottom line was significantly dented by a settlement with Italy’s internal revenue service, according to the fashion firm’s annual report.

In the year ended Dec. 31, net profit fell to 23.9 million euros, or $31.5 million, from 194.2 million euros, or $248.5 million, in 2012. In 2013, the group paid taxes totaling 381.8 million euros, or $502.8 million, compared with 157.8 million euros, or $200.4 million, in 2012. Last year, taxes included a payment of 270.9 million euros, or $357.6 million, to the Agenzia delle Entrate, the country’s revenue service, following investigations initiated in 2013 and concerning a number of companies controlled by the Armani group in the 2002 to 2009 period.

Although the group brought back the tax residency of these companies to Italy in 2009, the revenue office claimed that the group should have paid the income taxes in Italy, believing they should have been considered as fiscally resident in the country, said the report. While it has already paid the amount due, the group explained that it decided to do so “to avoid lengthy and costly controversies and to focus on its entrepreneurial activity.” However, it underscored that the “conclusions of the fiscal authority contrast with different and previous opinions expressed by the Agenzia delle Entrate, which, over the years, had affirmed the correctness and effectiveness of the foreign structures.” The settlement was first reported in April.

In 2013, group earnings before interest, taxes, depreciation and amortization rose 15.2 percent to 479.8 million euros, or $633.3 million, compared with 416.4 million euros, or $533 million.

As reported in May, in 2013, the Italian fashion company’s operating profit totaled 401 million euros, or $529.3 million, up 18.2 percent compared with 339 million euros, or $434 million, in 2012. Margins totaled 18.4 percent.

The report broke down sales by geographic market. Europe and Italy represented half of Armani’s total sales, reaching 1.09 billion euros, or $1.43 billion, up 15.1 percent compared with 2012.

North America was in line with the previous year, with sales of 355.3 million euros, or $469 million, accounting for 16.2 percent of the total and in line with the previous year. In the Far East, revenues amounted to 511.1 million euros, or $674.6 million, representing 23.4 percent of the total, in line with the previous year as the figures were impacted by the devaluation of the Japanese yen. The rest of the world grew 12.2 percent to 227.6 million euros, or $300.4 million.

Dollar amounts were converted at average exchange rates for the periods to which they refer.

In 2013, net working capital amounted to 699.4 million euros, or $923.2 million, compared with 564.8 million euros, or $723 million, in 2012. The company’s net worth totaled 1.34 billion euros, or $1.76 million, compared with 1.48 billion euros, or $1.9 million, a decline mainly attributed to the payment of dividends for 110.1 million euros, or $145.3 million.

Investments were entirely self financed. They totaled 100.1 million euros, or $132.1 million, compared with 157.7 million euros, or $201.8 million, in 2012, and were mainly channeled to strengthen the group’s retail network. The group spent 75.1 million euros, or $99.1 million, on its own stores last year, compared with 128.6 million euros, or $164.6 million, in 2012.

Europe accounted for around 43 percent of total investments, with openings in cities including Paris, Cannes and Marseille, France; Antwerp, Belguim, and Rome, Milan, Bologna and Bari, Italy. The group continued to invest in the Far East — in Japan, China and Hong Kong — allocating 29 percent of its financial resources to the region and opening three directly owned stores in Japan, and seven between China and Hong Kong.

Despite the ongoing uncertainties both in Italy and internationally, the group said it has continued to invest in the strengthening and extension of its distribution network, “opting of a mid-long-term growth strategy,” balancing retail and wholesale, all brands and all markets.

Last year, the company opened 105 freestanding stores both in emerging and established markets, and continued to invest in travel retail in Italy, Hong Kong and the U.S., with plans to further strengthen the channel in 2014. The group counts a total of 2,473 stores and 6,722 employees.

The company also continues to build its own production capabilities, opening a new sportswear pole in Tuscany last year, for example, and to further develop its logistics, including a new semiautomatic warehouse that will process 10 million pieces annually. Armani is trying to reach an agreement with Italian fashion and textile consortium SMI Sistema Moda Italia to define a standard technical text for the production and distribution of fabrics “that would most likely become a reference point for all the Italian pipeline,” said the report.

Although the first months of 2014 show a trend that “at a macroeconomic level is still quite weak,” and there are ongoing uncertainties in the euro area, the report said the company has seen “positive signals” in the group’s performance in the first quarter. “In line with its strategy, in 2014 the group will continue with its program to further expand its distribution network in emerging and mature markets at the same time,” said the report.

The group’s brands include Giorgio Armani Privé, Giorgio Armani, Emporio Armani, Armani Collezioni, AJ Armani Jeans, Armani Junior and Armani Casa, in addition to A|X Armani Exchange. In May, Armani unveiled ambitious plans to turn the A|X Armani Exchange brand into “the first global Italian fast-fashion brand targeting a young customer whose DNA is strongly Armani,” as the designer revealed he had acquired the remaining 50 percent of A|X that he did not already own from the Como Holdings Inc. venture called Presidio Holdings Ltd., with Christina Ong and her husband, Ong Beng Seng, Armani’s longtime business partners. The report stated that, as of Feb. 1, Presidio had sales of $494.3 million. Start-up costs totaled 75.7 million euros, or $99.9 million, upon the acquisition of the shares.

Indirectly, the group also controls the Caffe 42 Croisette Sas in Cannes through Giorgio Armani Retail Srl. The company also still has a 1.5 percent stake in its former eyewear licensee, Safilo. The designer’s eyewear collections produced and distributed by Luxottica launched in March.

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